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Recently the U.S. Supreme Court announced that they will be reviewing a case – Fifth Third Bancorp v. Duddenhoeffer – about the appropriateness of offering company stock in a 401k plan. Why would the Federal Government be concerned about company stock in 401k plans? Following are some potential reasons:


Why Company Stock In 401ks Is Bad



1. Company stock is risky


In a typical 401k plan that offers all mutual fund investment options, company stock sticks out as a very risky investment option. Due to potentially volatile price swings (which could include falling to worthlessness) investing a significant portion of a 401k plan balance in company stock is generally not a good investment strategy for most plan participants.


2. Plan participants may end up with too many eggs in one basket


Any participant investing in company stock in their 401k plan is concentrating risk rather than diversifying it. Their job is already dependent upon the health of the company. If they invest a large portion of their retirement plan account balance in the company as well, and the company falters, they could lose their means of support now and in retirement.


3. Objective advice is hard to find


Probably the biggest reason why the federal government is involved in this issue is because of what has happened to retirement plan participants invested in company stock at other public companies that have gone bankrupt. When a publicly traded firm goes through difficult times, senior management is often optimistic about future prospects, rather than realistic. Guidance issued by senior management during these times can be based more on hopefulness than facts. As a result, plan participants could be mislead into believing that they should continue to hold on to their stock when they probably should be selling it.


4. Employer fiduciary compliance is difficult


While senior management may be fighting for the life of the organization, it would appear in some cases that they should also be telling retirement plan participants that company stock is not a good investment, in order to maintain fiduciary compliance. Clearly, this would never happen in the real world since a wave of selling initiated from the 401k plan could be just enough to force the company out of business.

The outcome of the Court’s review will probably not be a clear prohibition on offering company stock in 401k plans. More likely, the Court’s ruling will result in changes to the conditions under which company stock may be offered. These changes may make it cost prohibitive or much more difficult administratively for plan sponsors to continue offering company stock in their 401k plans.

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About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at: https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.